Investment banks in Asia are taking advantage of a regulatory grey area to reap big returns from rising sales of equity derivatives, increasing the systematic risks to the financial system that regulators are trying to eradicate.

A joint venture of Hong Kong, Shanghai and Shenzhen stock exchanges will launch two new indices today and will this month allow the first batch of financial companies to use the indices for launching derivative products.

The Financial Services Authority said it found serious failings in reviews of products sold by HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking. The FSA looked at 173 sales to "non-sophisticated" customers and found that more than 90 per cent did not comply with the rules.

Deutsche Bank, JP Morgan Chase, UBS and Depfa Bank have been convicted by a judge in Milan for their role in overseeing fraud by their bankers in the sale of derivatives to the city.

Judge Oscar Magi yesterday ordered that about €90 million (HK$926 million) of assets be seized from the banks and that the firms pay sanctions of €1 million each. He also convicted nine bankers of fraud.

Hong Kong Exchanges and Clearing (HKEx), the operator of the city's stock and futures markets, expects a challenging time ahead after reporting a worse-than-expected 21 per cent profit drop in the second quarter.

Goodbaby International, a maker of strollers and other children's products, issued a warning last week that its first-half profit would be hit by foreign-exchange losses associated with currency derivatives.

The company noted that in last year's first half it had booked a gain on its bets on how the yuan would move against the US dollar.

The Securities and Futures Commission (SFC) will introduce two new licences next year to regulate investment banks conducting over-the-counter (OTC) trading and clearing as part of a global effort to curb risk and bolster transparency.

The reform will require a change in the law submitted to Legislative Council by the end of this year.

Barclays traders routinely co-ordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to documents released on Wednesday by US and British market watchdogs.

Hong Kong Exchanges and Clearing has agreed to pay GBP1.39 billion (HK$16.67 billion) for the London Metal Exchange, the world's largest metals marketplace, marking the local bourse's first overseas acquisition.

The price represents 180 times LME's profit last year of GBP7.68 million, which is too high, according to Hong Kong brokers, who are shareholders in local exchange.

Local investors like to boast how clever they are - unless they bought Lehman Brothers minibonds and other related derivative products. These Lehman investors have since gone out of the way to profess being financial illiterates, ignoramuses and idiots. And playing the fool has mostly given them what they want.

Hong Kong Exchanges and Clearing wants to buy the London Metal Exchange in order to diversify its business, but analysts question how the acquisition will really help the city develop its own commodities trading.